China households elude taxman - and official GDP bean-counters

[cirr]

China‘s GDP is understated by at least 25%，and the following article partly explains why（There are further items，such as R&D expense as capital formation，missing from the current official GDP calculation。The fact that China uses the production method rather than the expenditure method（practice adopted by the US and Japan etc）has also under-estimated its GDP by an average of 1.1% from 2003 to 2012）。

By Koh Gui Qing

BEIJING Wed Jan 22, 2014 4:00pm EST

BEIJING Jan 23 (Reuters) - China's famously frugal households may be living larger than they are letting on.

Economists have long warned that China needs to pump up domestic spending to offset an over-reliance on credit-fuelled investment and exports for growth, and in their latest blueprint for reform China's leaders have vowed to do just that.

Data released this week showing China's economy grew 7.7 percent last year suggested the imbalance is worsening, with consumption unchanged at just under 50 percent of GDP, but investment growing to slightly more than half.

A growing number of economists, however, say official statistics have got it wrong. To avoid taxes, consumers routinely get employers to buy things for them, resulting in a gross underestimation of how much consumers spend and exaggerating just how lopsided China's $9.4 trillion economy is.

"China's consumption is not low," said Zhu Tian, an economist at the China Europe International Business School in Shanghai, who co-authored a recent report on the subject. "It's actually desirable," he said.

Government estimates put household spending at roughly 36 percent of GDP, the result of a long decline from 49 percent in 1978. Household consumption in Thailand, which is slightly poorer than China in terms of GDP per citizen, is 56 percent of GDP, according to the World Bank. In the United States, households spend the equivalent of 69 percent of GDP.

But Zhu and other economists say government estimates overlook trillions of yuan in hidden household spending, particularly among China's increasingly affluent middle class. Add that and household spending amounts to about half of GDP, and more than 60 percent when combined with government spending, according to Zhu's study, which was published in September with Zhang Jun from Fudan University's China Center for Economic Studies.

The implications are far-reaching, at least statistically. If Zhu and Zhang are right, not only do consumers represent a larger part of China's economy than thought, but estimates of China's vaunted household savings rates may be inflated, investment's dominance may be overstated and China's economy may be larger than current estimates.

The government may also be due a lot of income tax.

Zhu and Zhang go even further, saying that their findings challenge the notion that consumption is inadequate, a problem analysts and policymakers, including the World Bank, have blamed on inadequate social safety nets such as unemployment and health insurance.

REFLEXOLOGY AND SING-ALONGS

Collecting data on consumption is challenging in any developing country because so many of the things people buy are informal services not captured by tax authorities, such as foot massages, karaoke sessions or food from street vendors.

"All of these issues with statistics are common to fast-growing economies," said Bert Hofman, chief economist for East Asia and the Pacific at the World Bank in Singapore.

China's statistics have drawn their fair share of brickbats from economists, who have resorted to a host of exotic alternatives - from consumption of salt to sales of imported Audis - to gauge the true health of the second-largest economy.

China's National Bureau of Statistics declined to comment, though it has in the past conceded it may be underestimating consumption. It plans to revise the way it calculates GDP as early as this year.

"After the correction," said Hofman, "China will look a lot more normal - more balanced, some would say."

In the meantime, economists say poor data collection paints an excessively bleak picture of consumption. One problem is sample size: China's statisticians base their estimates of household spending in this nation of 1.35 billion people, or 402 million households, on surveys of just 100,000 households.

Then there is the way they add up expenditures. Take housing costs. China tallies data on how much households pay in rent, but uses outdated values to calculate the value of housing to home owners.

PERQUISITE REPUBLIC

But the list does not end at rent. To compensate for lower wages, companies in China routinely lavish employees with gifts ranging from mobile phones and household appliances to luxury cars and vacations.

"This happens all the time, and of course it is not the right way," said Helen Qiao, an economist at Morgan Stanley in Hong Kong.

By taking part of their pay in undeclared perks, employees lower their taxable income and companies reduce their taxable profits. Perks are particularly popular among those Chinese with the biggest tax liabilities - its wealthy.

And while these items are for personal use, once a company pays for them instead of a private household, the expense is classified as a business cost and left out of consumption and GDP.

Omissions like that missed 7 trillion yuan ($1.2 trillion) worth of household spending in 2009, Zhu and Zhang estimate in their report. Morgan Stanley's economists calculated last year that government statisticians missed roughly $1.6 trillion in spending in 2012, meaning household consumption was actually equivalent to 46 percent of GDP.

But even at 50 percent of GDP, China still needs to get households to consume more domestic services if it wants to create a viable and growing middle class, said Kevin Lai, an economist at Daiwa Securities in Hong Kong.

"You can forever keep investing in new capacity, but where is the demand?" Lai said. "At the end of the day, you need to find demand to feed that capacity."

To Zhu, however, China's consumption levels are already healthy; it is Beijing's emphasis on boosting consumption that needs re-examination.

"All the talk about China investing too much and consuming too little is meaningless," he said. "The focus of change should be on improving equity and the efficiency of investment, not stimulating consumption."

China households elude taxman - and official GDP bean-counters| Reuters

 

[Genesis]

I guess the haters, not naming names, but you know who you are, were right. China did indeed give out fake numbers.

And those that says China can't find demand? Have they dated a Chinese girl?! Oh it will be there.

 

[Chinese-Dragon]

China's National Bureau of Statistics declined to comment, though it has in the past conceded it may be underestimating consumption.

Exactly right.

Economic activity is being significantly under-reported, across all sections of Chinese society. A lot of it is because people and companies want to pay less tax.

Not to mention the fact that America keeps whining that the Chinese Yuan is undervalued by around 50%.

According to that logic, our nominal GDP should actually be 50% bigger, even without taking anything else into account except the currency!

 

[cirr]

The world's second biggest consumer

Feb 18th 2014, 2:32 by S.C. | HONG KONG

CHINA is renowned for its powers of production not its appetite for consumption. Thanks to the prodigious growth of its output, it surpassed Japan to become the world's second-biggest economy back in 2010. But because consumption accounted for such a small share of China's GDP, it did not dislodge Japan as the world's second-biggest consumer.

That changed in 2013. Japan yesterday reported that its private consumption amounted to 292.9 trillion yen last year ($3 trillion, or 61.2% of GDP). Consumption by the government added another 98.5 trillion (20.6% of GDP).

China has not yet reported equivalent figures of its own for 2013. But we know enough to conclude that its consumers outspent Japan's.

China has reported a GDP figure for last year. That number (56.9 trillion yuan or $9.25 trillion) is not perfectly suited for our purposes. Strictly speaking, it refers to how much was produced within China's borders, not how much was spent on this output.* But it will do.

If this figure is any guide, then Japan's private consumption was equivalent to only 32.4% of China's 2013 GDP. Japan's total consumption, including government spending, was equivalent to 43.3%. These small percentages partly reflect the sharp drop in Japan's currency: the market exchange rate averaged about 15.88 yen to the yuan in 2013.

How do those percentages compare to China's own consumption ratios? In 2012, China's private consumer spending amounted to almost 36% of its GDP. Adding government outlays pushed up its total consumption to 49.5%. China has not yet reported consumption rates for 2013. Some economists think that household consumption's share remained flat last year. Others suspect it fell a bit. But no one thinks it collapsed below 32.4%.**

It therefore seems safe to say that China was the world's second-biggest consumer economy last year.

China's level of consumer spending still remains far below America's. But it is growing much faster in percentage terms. It may even be growing faster in absolute terms. If government outlays are added to household expenditures, China probably added more than any other economy to global consumption last year, as it did in 2012 and 2011 (see the post by Steven Barnett of the IMF here).

If only China's consumers were a little easier to please.

*In principle, the two figures should match. This is because the market value of production is nothing other than the amount people spend on it. Counting production and counting expenditure should be two different methods for counting the same thing. However, in practice, there is always a small discrepancy between the two. From 2003 to 2012, China's GDP, calculated by the production method, averaged almost 1.1% less than China's GDP calculated by the expenditure method. It is therefore likely that Japan's consumption was even smaller relative to China's GDP than the above estimates suggest.

** For China's private consumption to have fallen below 32.4% of GDP last year, it would need to have shrunk in nominal terms by over 3%. That could not have happened given everything else we already know about China's economy in 2013. For example, we know that overall consumption grew by over 2 trillion yuan in real terms, because China's National Bureau of Statistics reported that it contributed half of China's growth. We also know that consumer prices rose by 2.6% last year. Therefore nominal growth in consumption must have been faster than real growth. That is backed up by the retail sales figures, which increased by 13.1% in nominal terms.

China's economy: The world's second biggest consumer | The Economist

 

[Edison Chen]

Household spending as percentage of GDP is relatively low, although our middle class is growing fast. If government reduce a certain amount of capital expenditure, and increase a certain amount of social benefit expenditure, like health care insurance and education fees, to alleviate people's burden on mortgage loan, probably people will be motivated to spend more, because their life, insurance and education is guaranteed. They feel safe, they are able to spend more. In fact, the negative effect of lower infrastructure expenditure will offset by more consumption. Our economy still on the rise, nothing changed but Chinese will get richer.